Geopolitics put markets in ‘risk off’ mode

Equity markets have given up some of their recent gains as investors wait to see how escalating tensions between the US and Syria and the US and North Korea play out, according to AMP Capital.

In a note to investors, AMP Capital chief economist Shane Oliver said markets had been “dominated” by geopolitics, with the US’ missile strike against Syria and the “steadily building” pressure around North Korea weighing on investor sentiment.

“As a result, Australian shares gave up most of their gains from earlier in the week to end 0.5 per cent high, but US and eurozone shares lost 1.1 per cent, Japanese shares fell 1.8 per cent and Chinese shares lost 0.9 per cent,” Mr Oliver said.

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“Safe havens like gold, government bonds and the yen rallied.”

BondAdviser noted that 10-year Australian government bond yields dropped to their lowest level since November 2016 in the wake of these geopolitical developments, hitting 2.45 per cent.

US 10-year government bonds also saw their yields drop, according to BetaShares chief economist David Bassanese, breaking below their “previous 2.3 – 2.6 per cent range”.

“Geo-political tensions were the main theme of last week, with concerns over a possible US-Russia dispute arising out of the Syrian missile strike giving way to heightened tensions over North Korea,” he said.

“US President Trump seems to have adopted a ‘it's time to clean this mess up once and for all’ approach, and the world is now awaiting to see if he can convince China to convince North Korea to throttle back on its belligerence.”

Mr Bassanese noted that “gold rather than the US dollar” appears to be the preferred safe haven, with oil, “helped by a weaker US dollar and low US inventories”, also seeing a lift.

The upcoming US quarter one reporting season, however, looks “promising”, Mr Bassanese said, with S&P 500 earnings expected to have grown 10 per cent on the same quarter a year ago.

“Although US stocks eased back last week, they are still holding up pretty well (2 per cent off their peak) considering the possible serious geopolitical risks now emerging – and the fact foreign policy, rather than tax cuts, is now occupying the mind of US President Trump,” he said.

“The promise of a good earnings season – and knowledge that the Fed would back off on any near-term rate hikes if geopolitical risk intensified – is likely supporting sentiment.”